Starting a Side Business? Your Complete Guide to Side Hustle Taxes and Deductions

Starting a side hustle is an exciting adventure, whether you’re finally cashing out your childhood hobby, freelancing on the side, or launching a small business. But with every money-related initiative comes tax obligations.

Side hustle income is taxable from the very first dollar.

The good news? These taxes aren’t as scary as they sound. With a little know-how and some simple planning, managing your tax responsibilities can be pretty easy. You can even save significant money and headaches down the road.

Don’t know where to start? Here is a complete breakdown of everything about side hustle taxes to help you stay on the right side of the IRS.

Side hustle tax requirements: income limits and when you must pay taxes

Side hustle income becomes taxable from day one. Any money earned through a side hustle — whether cash, checks, or payments through apps like PayPal or Venmo — counts as taxable income. Even if it’s just a few dollars here and there, it needs to be reported to the IRS.

Remember, if your net earnings from self-employment is $400 or more in a year, you’re required to file a tax return and pay self-employment tax. Many side hustlers think that such small amounts don’t matter, but they can lead to penalties and interest if they remain unreported.

So, keep track of your bottom line from the start and consider every payment taxable income.

Business tax deductions that can save you thousands on taxes

One of the best parts about running a side hustle? Tax deductions! You get to deduct business expenses, which means less income is taxed. A business expense is any cost that’s necessary for running your side hustle.

Here are some of the most common expenses you can deduct:

• Tools and Supplies: Anything you buy specifically for your side hustle counts. It can be craft materials, software subscriptions, or equipment like a camera or laptop.

• Home Office Expenses: If you have a dedicated space in your home for your side hustle, you can deduct a portion of your rent or mortgage interest, utilities, and even internet bills. This deduction can add up, so it’s worth measuring your workspace and keeping good records.

• Vehicle Expenses: If you use your car for business purposes, you can deduct either the actual expenses (gas, maintenance, insurance) or use the IRS’s standard mileage rate (70 cents per mile for 2025). Just be sure to keep a detailed mileage log.

• Education and Training: Courses, workshops, or books that help you improve your side hustle skills are deductible. Investing in yourself pays off twice — once in knowledge, and again in tax savings.

• Phone and Internet: If you use your phone or internet partly for business, you can deduct the business-use percentage of those bills. For example, if 40% of your phone use is for your side hustle, you can deduct 40% of the cost.

Keep all receipts and invoices to provide to the IRS during an audit. For easier tracking, you can open a separate bank account or credit card for your side hustle. It will also reduce the risk of mixing personal and business costs.

Quarterly tax payments: avoid IRS penalties with proper estimated tax planning

If you've had a traditional job, you know that income taxes are automatically withheld from every paycheck. That doesn't apply to a side hustle. Instead of automatic tax withholding, you have to pay taxes proactively through quarterly estimated tax payments. This applies if you expect to owe $1,000 or more when filing your return, after accounting for any tax withholding from other sources like a W-2 job or retirement distributions.

The self-employment tax rate is 15.3%, covering 12.4% for social security (old-age and disability insurance) and 2.9% for Medicare (hospital insurance), on top of regular income tax. It is a separate tax from the income tax. Half of it is deductible when calculating your adjusted gross income, which can reduce your overall tax burden.

To avoid a surprise tax bill or penalties, estimated taxes are due on these dates:

• April 15, 2025

• June 16, 2025

• September 15, 2025

• January 15, 2026

Using IRS Form 1040-ES or tax software can simplify calculating and submitting these payments. Staying on top of quarterly taxes keeps cash flow steady and prevents last-minute scrambles. A tax professional can help you determine the amount you should pay each quarter to avoid penalties.

Side hustle tax documentation: record-keeping best practices and requirements

Good records are the backbone of stress-free tax filing and maximizing deductions. Here’s how to keep it simple:

• Use a spreadsheet, app, or bookkeeping software to track income and expenses regularly.

• Save bank statements, invoices, receipts, and mileage logs.

• Separate personal and business finances by using a dedicated bank account or credit card for your side hustle.

• Keep digital copies of documents to avoid losing paper receipts.

Organized records not only make tax time easier but also protect you in case of an IRS audit.

Business structure: sole proprietorship vs LLC tax implications and benefits

Most side hustles start as sole proprietorships by default, meaning the business isn’t legally separate from you. This setup is simple and requires minimal paperwork, but it doesn’t provide liability protection.

On the other hand, establishing an LLC (Limited Liability Company) can offer personal liability protection and potential tax advantages, but it involves extra costs and administrative tasks.

Choosing the right structure depends on your side hustle’s risk level, income, and long-term goals. So, it's best to consult a tax professional before starting your new venture. They will tailor the best option for you.

Common mistakes to avoid when filing taxes for your freelance business

If you hire a tax professional, they will take care of all the legwork on your behalf. This way, you won’t get into legal trouble and receive maximum deductions on your taxes.

Some common mistakes that many freelancers make include:

• Not reporting all income. Even small amounts count, and you should report them to the IRS.

• Skipping quarterly estimated payments. Always keep an eye on the tax submission dates, even if you have a tax consultant. Missing the deadlines might result in penalties and interest.

• Mixing personal and business expenses. Keeping your finances separate will avoid confusion during the audits as well as lost deductions.

• Poor record-keeping. Always save your documents and receipts to keep track of your expenses.

• Ignoring self-employment tax. Remember, it’s a separate tax from income tax, and you should report it.

Conclusion: manage your side hustle taxes for complete financial freedom

A side hustle is a powerful step toward achieving financial freedom, but it has a tax side that needs proper management. You can take care of it with early planning, organized record-keeping, and a clear understanding of your tax obligations.

You can always reach out to a tax professional for personalized guidance. The easier, the better! If you’d like a touch point before consulting a tax professional, you can book a 20-minute or 50-minute session with a Mentor through your Fruition account to get a big-picture view of your starting point. Our Mentors can answer any questions you have and give you actionable steps to make your side hustle dreams become reality.